Report: Canada’s manufacturing sector shows signs of trouble in June

S&P Global Canada’s Manufacturing Purchasing Managers’ Index (PMI) was down in June from May (56.8), registering at 54.6. While the numbers indicate 24 months of continuous growth, the PMI dipped to a 17-month low and the improvement was the third-weakest in this sequence.

The two largest components of the PMI by weight – output and new orders – were behind the latest moderation. Both sub-indices dipped from May and fell to 24- and 23-month lows, respectively.

“There were signs of difficulty in Canada’s manufacturing sector in June. The PMI dipped to the lowest for 17 months amid softer uplifts in output, new orders, purchases and employment. Global supply issues and steep price pressures were at the heart of the issue, and are expected to continue to disrupt the manufacturing economy this year,” commented Shreeya Patel, Economist at S&P Global Market Intelligence.

The second quarter ended with a softer improvement in operating conditions for Canadian manufacturers, as per the latest data from the survey. Output expanded at the softest pace for two years, while new orders rose only moderately. Employment and purchasing activity had weaker uplifts, while exports fell for the first time in four months. Survey respondents noted that constant price increases and material shortages impacted demand and output growth as input price inflation ticked higher.

New orders had weaker growth, with sentiment dipping low. Firms shared concerns over the global economy and the lingering implications of COVID-19.

Production volumes were up in June, showing expansions in each month for the last two years. Growth eased considerably from May and was only marginal overall. Softer inflows of new work, material delays and higher costs were reportedly behind the slowdown.

While new orders rose at the end of the second quarter, the rate of expansion was the weakest since July 2020. Firms cited that while demand continued to expand, price hikes deterred some clients from placing orders.

Exports dropped for the first time in four years, softening the overall sales growth. Although modest, the rate of decline was the joint-steepest since July 2020. Respondents blamed the war in Ukraine and weak demand from Europe and Asia.

Faced with increasing orders, firms in Canada raised their headcounts. The rate of growth was solid but softer than that seen in May, and the joint-weakest for nine months.

The war in Ukraine and lockdowns in China added to transportation difficulties in June, alongside mentions of port congestion and container shortages. Vendor performance worsened in June, with the latest deterioration among the sharpest in the series. With firms facing delays receiving some key inputs, there was a further accumulation of backlogs.

Input price inflation was substantially up and at an accelerated pace in June. Higher prices were reported for a range of goods and services including metal, fuel, energy, resin and transportation. Overall, the rate of increase was marked and among the quickest in the series history. A general uptick in expenses contributed to another sharp increase in selling prices at the end of the quarter.

Rising prices paired with weaker output growth led to a softer increase in buying activity in June. Stocks of purchases meanwhile rose only marginally, and at the softest pace for 16 months. Firms were still optimistic for output growth over the next 12 months.

“Canadian manufacturers particularly struggled with sourcing key materials. A notable slowdown in purchasing activity could hinder production significantly over the coming months. Sales was also hit hard, but more so from international markets at the end of the quarter,” added Patel. “A dip in confidence indicates firms are aware of the real difficulties that could hit the global economy in the next 12 months. Firms have recovered well from the pandemic and will now have to gear up for further hardship.”